tv Nightly Business Report PBS August 16, 2010 6:30pm-7:00pm EDT
>> susie: investors rush into bonds, seeking safety from a shaky global economy. and that pushes treasury yields to fresh lows. >> tom: but yields are even lower on "tips," those treasury inflation-protected securities. should they be in your portfolio? you're watching "nightly business report" for monday, august 16. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by: this program is made possible by contributions to your pbs station from viewers like you.
captioning sponsored by wpbt >> susie: good evening everyone. more jitters in the financial markets today about the outlook for the global economy. tom, investors stayed away from stocks and poured money into bonds-- what they consider a safe haven. >> tom: as a result, susie, the yield on the ten-year treasury fell to its lowest level since march of 2009. falling rates are a sign of a weak economy. the yield on the ten-year is just below 2.60%. to put that in perspective, it was 4% earlier this year when many experts were more optimistic about the u.s. economy. >> susie: meanwhile, something very unusual is happening in the market for treasury inflation protected securities.
for only the second time ever, the five year "tip" is yielding zero. that means people buying them are actually losing money to inflation. why is that happening? and what does it mean? and why in the world would anyone buy tips now? erika miller got some answers. >> reporter: investors worried about the economy are not going to like the message being sent these days by inflation- protected bond the securities, called "tips," are paying historically low yields. so low that the yield on five- year tips is hovering near zero. that means that once inflation is factored in, the bonds are actually losing money. though inflation is not a worry now, economist jerry webman believes investors are worried it will become a problem in the next few years. >> you are taking an opinion here that it's worth giving up current income now for the possibility that inflation will cause the principal value to appreciate over time because the redemption value goes up, by
law, with the rate of inflation. >> reporter: but that may not be the only reason demand for tips is strong these days, particularly among big institutions. economist julia coronodo believes some tips buyers are seeking protection from falling prices or deflation. >> tips have a floor at zero, so you don't actually lose principal if we actually have deflation... if inflation becomes negative. so, it does provide you some insurance against the downside and really insures the real value of your principal. >> reporter: she expects yields on tips will remain at exceptionally low levels until it's clear that inflation is a greater risk to the economy than deflation. the big question for individual investors is whether there's any reason to buy tips now. in most cases, financial planners say no. but in certain cases, it could make sense.
>> if you did have the view that deflation is a very likely outcome, then the yields we are seeing could make a lot of sense. so, if you actually fear that one of the more extreme scenarios is likely, either in inflation or deflation, other assets are not likely to perform very well. >> reporter: what's happening in the tips market is a reflection of what's happening in other asset classes-- serious fear of risk. many investors are more concerned with getting a return of their capital than a return on their capital. erika miller, "nightly business report," new york. >> susie: also today, the treasury said foreign holdings of u.s. debt rose in june to $4 trillion. but china cut 3% of its u.s. treasury holdings as it worked for a second straight month to diversify its massive portfolio of international debt.
>> tom: here are the stories in tonight's n.b.r. newswheel: the markets tread water. the dow fell a point, while the nasdaq gained eight and the s&p 500 was up a fraction. trading volume started the week light. under 800 million shares traded on the big board. nasdaq volume came in at 1.6 billion. with the home buyer tax credit now a memory, homebuilders aren't feeling so hot about their prospects. in june, the national association of home builders' monthly sentiment index fell to its lowest level in more than a year. the fed said banks began easing lending standards for small businesses during the second quarter, the first time that's happened in four years. but the data show easing of standards is happening mostly at the nation's biggest banks. and, general motors appears to be ready to start its much- anticipated initial public offering. reuters says g.m. has finished the paperwork and will file with the s.e.c. tomorrow. >> tom: still ahead, deepwater drilling. it faces a rocky future in the u.s., but brazil is counting on
big profits from under the sea. >> susie: our guest tonight doesn't think the u.s. economy is headed for another recession, but he's also trimming back on stocks. joining us now, stuart schweitzer, global market strategist at j.p. morgan private bank. hi, stu. >> hey, susie, good to be here. >> so what exactly are you telling your clients to do right now? >> oh, i think number one, susie, not to panic in here. there's a lot of fear and loathing around concerning the u.s. economy, the global economy, the outlook for policy, both monetary policy and from the government. and this is a time to, i think, to stay cool. the economy does not appear to be going back into a renewed recession. we have had a slowdown. the slowdown is continuing. but the economy is not reversing fieldss in our
opinion. >> all right, now we are getting alot of economists who are calling for a recession, even a top official in britain said today that the possibility of a double dip recession, you know, is out there. it could be what happen. how are you factors all of those forecasts and the uncertainty into your investing strategys in terms of what you are doing with client portfolios? >> well, number one, susie, we are w we are emphasizing that part of the world which is growing the fastest, and that is asia excluding japan. japan is unfortunately mird again in recession. but the rest of asia developing asia is really developing. and you probably saw the headlines. your viewers saw the headlines this morning. japan is now a smaller economy than that of china. china is growing really, really rapidly. and we expect that by and large to continue and we expect that to pay dividends for its more adaptable
neighbors in the region, japan lingering and not so adaptable. so we think that's an area for opportunity. >> opportunity in what way? are you saying that american investors should be buying equities in china or government bonds? i mean how do they take advantage of that? >> yes, so not equities directly in china because that's pretty tricky business for us over here so far away. but i think to own a basket of equities through some kind of a fund structure, equities in the emerging asian economies overall. so some in korea, some in china, perhaps, some in hong kong, some in taiwan, some in indonesia, mall ashe ya, india, of course, and so on, a basket. but we are talking about equity investments there. >> so give us an idea of some kind of allocations. what are you telling your clients to do about their u.s. holdings versus these international holdings, also
fixed income. we saw, you heard our report, a lot of money going into treasuries again today. how are these supposed to difficulty all this up? >> well, i think the other area of particular interest right now is not treasuries because treasury yields as you your comments earlier highlighted, are very, very low. but there remains opportunity in two key areas. one is in domestic high-yield bonds which are yielding somewhere in the neighborhood of six and a half percent more than comparable maturity treasuries. and we think that the upper-end of high yield credit structures are up pretty good. so the companies that are almost investment grade. we think by and large should do reasonably well even in a slow-growth economy. and then there are local currency bonds in the emerging market economies which are yielding in the neighborhood of four to 500 basis points more than comparable maturity u.s. treasuries. >> so you are talking about
high yield, i'm sorry to interrupt. when are you talking about high yield, are you not talking about junk bonds, are you talking about high-grade corporates, right? >> i'm talking about the high end of what used to be called junk bonds. >> okay,. >> that we now no longer use that term. we call them high yield but there all different credit grades in there. some of them are really weak credit. and others are almost as good as investment grade. almost as good as high-grade, and those are the ones that we would suggest emphasizing for a combination of return and risk control. but your questions highlight the fact that it's very difficult to have an overall portfolio structure that doesn't take risk and can earn some kind of reasonable return. if an investor today wants to earn a reasonable return, unless you go whole hog, let's say, in emerging market debt or high-yield debt, something i wouldn't be inclined to do, then to earn return in the rest of your portfolio you have to
be taking some equity risk and probably i would want to balance that with a measure of cash and with some government bonds. but i wouldn't be chasing the bond market here. the government -- >> just a few seconds left. when you talk about some equity risks, what types of companies are you talking about. i know you can't name names but what kind of companies are you talking about? >> well, in the u.s. and in europe i'm talking about companies with lots of international exposure. industrial companies that still stuck to the emerging market economies,. >> we have to leave it there. thanks so much, stu. >> always a pleasure. >> we've been speaking with stuart schweitzer at >> tom: a federal judge today refused to sign off on a $75 million settlement between citigroup and the s.e.c. last month, the agency fined the bank for allegedly hiding nearly $40 billion worth of subprime securities during the financial meltdown. the judge was supposed to okay the agreement, but she balked, saying she didn't have enough
over talk helped boost technology, especially in the data storage business. the excitement was ignited by dell spending $1.2 billion of its cash on 3par, a company that makes storage systems focused on cloud computing. that's the practice of on-demand computing, sharing computing power with other users. 3par shareholders will get $18 per share from dell. the deal dropped dell stock by a nickel. with this deal, dell still will have just under $10 billion in cash. 3par stock soared on the buyout, clearly a big premium to friday's closing price. others in the data storage business saw some spillover buying. of these three, isolon systems is the biggest, with a market value just over $1 billion. shares are about $1 away from a new high. netezza jumped 4% on stronger- than-usual volume, and compellent technologies up 10%. still, c-m-l shares are down more than 40% this year.
one more corporate deal, this one in health care. pharmacy benefits manager medco will buy the privately held united biosource for $730 million in cash. united biosource is a drug and medical device researcher. medco stock dropped 2% on light volume. it is less than $1 away from a new 52-week low. hanging over the broad market, a tough outlook for housing. we mentioned the drop in the homebuilders' confidence survey earlier. that was after a cautious outlook from lowe's. the home improvement retailer had profits a penny less than anticipated, and sales were lighter than expected. appliance sales were a bright spot, showing a double digit increase thanks to federal rebate programs. the stock took the earnings and sales disappointments very well, considering shares finished fractionally stronger, and on twice its usual volume. the firm bases its cautious outlook on questions regarding the job market. home depot is next. its earnings are due tomorrow. the stock has been bouncing between $27 and $29 per share
since june. the outlook and its competition with lowe's will be two areas of focus for investors. one of the biggest reads on the u.s. consumer also is due tomorrow. wal-mart's second-quarter earnings are scheduled before the opening bell. wal-mart has seen four straight quarters of negative same-store sales in the u.s. it does not report monthly figures, so investors will be looking to see same-store sales trends have improved. the company also has a unique perspective on consumers. last quarter, it said shoppers remained concerned about jobs. it has been a choppy 12 months for wal-mart shareholders. shares are in the lower end of that range heading into tomorrow's report. there has been plenty of volatility among for-profit education stocks this summer, with the market trying to figure out how new government rules on student lending may impact future profits. the department of education wants to require for-profit schools to have at least 45% of their graduates paying back their student loans, if those
schools are to remain eligible for federal student aid. corinthian colleges, education management and strayer education all hit new lows on stiff sell- offs. investors sold today over worries about potential penalties for schools graduating students with big debts, and not getting jobs. strayer, for one though, says the government's analysis is at odds with its own analysis of student debt loads. meantime, student lender nelnet jumped 5%. late friday, it settled claims that it made false statements to get extra government subsidies for writing student loans. and that's "market focus."
>> tom: the capping of the b.p. oil spill in the gulf has not ended the uncertainty about deepwater drilling in the u.s. while america debates the future of going after energy deep underwater, brazil is counting on it. this is one of the stories in the september issue of "bloomberg markets" magazine, which hits newsstands tomorrow. peter millard is a brazil-based reporter with "bloomberg markets" magazine. he joins us from sao paulo. peter, welcome to nightly business report. when we're talking about oil drilling in brazil, we're talking about petrobras, one-third owned by the government. so what is the deep water opportunity in brazil? >> good evening. yes, in brazil they've made enormous discoveries off the coast of brazil's atlantic and the company plans to double oil production over the next ten years. in total, they plan to extract 50 billion barrels
of oil from deep water oil reserves. and that's just to give you a little perspective. more than twice the amount of oil reserves in the united states right now discovered oil reserves in the united states. so that's tremendous opportunity for petrobras, the state oil company. they're the main driver of this production growth in brazil. and there's also opportunities for foreign oil companies, repsal, bg, guelp, chevron, these companies have all bought exploration blocs in brazil, some of them are already producing and they're exploring for oil. and they will be producing more oil in the coming years. and brazil also plans to sell exploration licenses in the coming years. sell licenses. >> let's concentrate on petrobras in deep water. because clearly this is where the company is concentrated in. 85% of its production in brazil is in waters at least
1,000 feet deep. 20% of all deep water production across the globe is from petrobrasment so is deepwater drilling off the coast of brazil any different than say the gulf of mexico in the suchlt. -- u.s. in. >> yes, in brazil we have this thick layer of salt that is miles below the ocean floor. and this makes it difficult for oil companies to find the oil reserves. the salt makes it difficult to do seismic research. and only in the past decade have they developed the seismic equipment that can penetrate the salt layer and try and identify where the reserves of oil are. that's why we've seen so many discoveries in brazil over the past decade. before that the-- technology didn't really exist. >> what about penetrating that salt, how well prepared is petrobras in brazil to deal with say a b.p. disaster should one happen? >> drilling in the salt is
difficult. in a rock formation, in a sedimentary rock formation the rock is more stable than the salt. in the salt the salt likes to move around it can break the oil piping as they're drilling a well. recently petrobras had to abandon a well just a couple of weeks ago in the salt because they had mechanical problems in the salt, they had to cap the well. and start drilling again just a few kilometers near it. so there are tech cole challenges. >> we have to leave it there. we are time challenged here on nbr but we appreciate the inghts, petrobras and looking at deepwater drilling in brazil, peter millard bloomberg reporters with bloomberg markets magazine. >> susie: here's what we're watching for tomorrow: we'll get a check on inflation at the wholesale level with july's producer price index. also tomorrow, the july reports on housing starts and industrial production. and the future of housing finance in the u.s.-- the treasury hosts a summit to fix mortgage giants fannie mae and freddie mac.
>> susie: one of the web's most popular video services may be going public. reports say hulu could be planning an initial public offering, valuing the company at more than $2 billion. hulu streams popular t.v. shows and is owned by media powerhouses nbc universal, disney, and newscorp. a multibillion-dollar i.p.o. would highlight the changing nature of t.v. programming, which is no longer found just on t.v. >> tom: here's a growing business on the internet-- malicious software that can take over and harm your computer. web security firm mcafee says in the first six months of this year, ten million pieces of dangerous code were found. that's a new record. and don't think just because you're using a mac, rather than a p.c., you're safe. mcafee says it's seeing more of what's called "malware" being written for apple products these days.
>> susie: in the commentary tonight, finding a middle ground in the debate over tax cuts. here's mark zandi, chief economist at moody's economy.com. >> unless congress and the president act soon, americans' taxes will increase on january 1. almost everyone agrees that this makes little sense, given the economy's fragility.
unfortunately, consensus ends there. the president supports permanently extending the current tax rates for all except the highest-income households, while congressional republicans want all of the cuts to be made permanent-- but to slowly phase in higher rates on upper-income households beginning in 2012, when the economy will be on firmer ground. raising taxes on anyone now when the economic recovery is so vulnerable, would be a mistake. our fiscal problems are daunting, but if the recovery were to unravel back into recession-- a possibility that cant be dismissed, particularly if tax rates increase anytime soon, our problems would become overwhelming. allowing the tax cuts for high- income households to expire over, say, a three-year period, would not harm the economy. no more than 3% of households will be impacted, and the tax increases are small and tax rates low enough they won't materially impact their decisions about working and investing. this is not to say that the tax
code should be off limits when deciding how to fix our fiscal problems. everything must be on the table. past experience with fiscal austerity here at home and overseas strongly suggests that it best for the economy's long- run performance to restrain government spending rather than raise taxes, but that must be part of our national debate. this is mark zandi. a big summit tomorrow on u.s. housing finance. >> yes, and we are going to be covering athat gavel to gavel. >> that is nightly business report for this monday nice. >> good night to you, tom, i'm susie gharib. thanks for watching and we hope to see all of you again tomorrow night.